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Dell Will Probably Need More Time

Dell's strategic changes are unlikely to yield profit in the short term.

Dell(Nasdaq: DELL) seems to be in acquisition mode once again as it attempts to transition from being just a computer manufacturer to being a more broad-based enterprise solutions provider offering a host of networking and storage facilities. And its latest plans may include the purchase of Quest Software(Nasdaq: QSFT), a maker of software tools that allow companies to better manage their IT-based operations. Quest also offers data back-up and recovery options which fit in well with Dell's overall strategy of offering comprehensive enterprise-based offerings.

The question is: Will it be too late before the strategy actually begins to offset the growing headwinds for Dell in its bread-and-butter PC-based business? Unfortunately, the answer may just be a yes.

Everyone knows that Dell has been having a hard time lately. Not only did the company record disappointing first-quarter revenue and profits, it also posted a second-quarter revenue outlook that missed analyst estimates. But the problem is not specific to Dell, as the company bears the brunt of a softening trend in companies' tech spending, the recessionary phase in Europe and its continued resistance to competitive pricing. The increased popularity of mobile computing gadgets, led by the iPad, hasn't really helped either. Even competitor Lenovo, which seems to have been benefiting from a fast-growing Chinese market, has hinted at a possible slowdown in Europe and U.S.-based markets. But then Dell doesn't have China to fall back on.

As Dell realizes it's facing a possible erosion in PC sales thanks to weakening consumer demand, the company has made a conscious effort to cater to the IT-related needs of its small and medium enterprise customers. This falls in line with competitor Hewlett-Packard(NYSE: HPQ). HP incidentally does seem to have a well thought-out strategy in place as it aims to combine its PC and printing divisions.

There are two other points that deserve mention when you're talking about Dell's shift in strategy: the company's pinning its hopes on Microsoft Windows 8 operating system and a tendency to capitalize on the recent cloud-computing boom. The first one is unlikely to lift Dell's prospects much higher, as businesses are still adapting to the Windows 7 OS. The only way Dell can hope to make profits in this area is by launching a line of Windows 8-based tablets.

The cloud-computing space is again an area where Dell is planning to make major inroads, as it acquired a slew of related companies such as Wyse Technology, Clerity, and Make Technologies. At the same time, cloud computing is still at a nascent stage and there's always companies like Amazon to contend with.

Dell's strategies are unlikely to overcome its weaknesses until well into 2013. With companies in the U.S. and Europe likely to cut down on their IT spending for some time more, I'd prefer to watch Dell from a distance for now. If you want to do the same, do not forget to add Dell to your free watchlist.

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